Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 14, Problem 5CQ
To determine
Explain the effect of an unanticipated increase in money supply in the short run and effect of an expansionary
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Which of the following is an appropriate monetary policy to combat a negative GDP gap?
a.
raise income tax rates
b.
increase government spending
c.
lower real interest rates
d.
raise real interest rates
Suppose a wave of negative “ animal spirits” overruns the economy, and people become pessimistic about the future.What happens to aggregate demand? If the Fed wants to stabilize aggregate demand, how should it alter the money supply? If it does this, what happens to the interest rate? Why might the Fed choose not to respond in this way?
Hello, I need help with a macroeconomics question. Thank you in advance!
The answers are based on a short exerpt from the Federal Reserves press release from Feb 1, 2023 (attatchde below).
7. What do you expect to happen to the money supply?
8. What do you expect to happen to the inflation rate?
9. How would you expect all these decisions to affect employment in the economy?
10. How do the effects you found on 8 and 9 align with what the Fed was hoping to attain?
Chapter 14 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- Critically analyze what facts determine the impact of an interest rate change? How effective is monetary policy?arrow_forwardWhy do Keynesian economists believe increasing the money supply is a good idea? Use the equation of exchange in your answer.arrow_forwardSuppose that the government decides to increase government expenditure. a) Is this a fiscal or a monetary policy? b) Is this an expansionary or a contractionary policy? c) How will the equilibrium output and interest rate change in goods and money markets, respectively. Explain using the diagrams.arrow_forward
- "According to Keynesian theory, an increase in the money supply can cause interest rates to fall without affecting nominal income. In this case, how does the velocity of money change? Explain and demonstrate using the money market graph."arrow_forwardSuppose there is an increase in money demand because of a stock market boom that raises people’s wealth. Draw the money market model to show the stock market boom impact on the interest rate. Will investment and consumption increase or decrease because of this event? What should Fed do if it wants to maintain the original interest rate? Show the impact of the Fed’s action in the graph of part a. Will investment and consumption still change if the Fed takes its action?arrow_forwardChanges to both the money supply and the velocity of money include changes in aggregate demand. However, the long-run impacts of changes in these variables are different. How are the effects of an increase in the velocity of money and the effects of an increase in the money supply different?arrow_forward
- If the economy has rational expectations and the model is sticky price model. Could you explain why the following statement true in macroeconomics?arrow_forwardThe diagram on the right shows the demand for money curve in a hypothetical economy. Suppose that the economy is initially at point E. Suppose that due to changes in expectations in the financial markets, the quantity of money demanded increases because of speculative reasons. This change would be associated with a movement from E to point EB C Interest Rate % EB Eo EA Quantity of Money MD (Y,P)arrow_forwardwhat is the reason why monetary policy cannot keep GDP above its full-employment level for an extended period of time? options: fiscal policy will not allow this type of monetary policy to continue nominal wage expectations will eventually adjust to reflect monetary policy induced inflation restaurants will stop raising prices the unemployed will eventually protestarrow_forward
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